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Rent-to-Own: Too Good to be True?

Texas lease-options, or “rent-to-own” contracts in layman’s terms, are often looked at as a simple solution to a common problem, but prospective tenants/buyers too often pursue lease-options without understanding what they are signing up for.  In its simplest form, a lease-option is a standard lease of real property coupled with an option to purchase the property at a later time and under specific terms and circumstances.  In theory, this presents an extremely attractive opportunity to prospective homeowners that desire to purchase a home and require immediate housing, but otherwise are not in a position to immediately purchase the home for one reason or another.  So, why fear lease-options?

To begin with, tenants/buyers need to understand that lease-options are essentially two separate contracts (even if combined into one signed form), and there are separate terms and conditions governing each of the separate contracts. The lease-option is a lease that requires the tenant/buyer to consider all the standard terms governing a landlord/tenant relationship (e.g., term, rentals, responsibility for repairs, etc.), but it’s also an option agreement to purchase the property, which entails separate consideration and benefits. The option agreement typically includes a standalone option fee, which must be paid upfront and is generally nonrefundable, and the amount of which is credited against the ultimate purchase price of the property should the tenant/buyer exercise the purchase option. However, if the tenant/buyer breaches the lease or fails to exercise its purchase option, the landlord/seller is usually entitled to keep the entirety of the option fee. Without understanding all the terms of the lease-option, a tenant/buyer could easily find himself without a house and having received zero benefit for the option fee.

That being said, the tenant/buyer is not the only one that should be concerned with lease-options. In most lease-option scenarios in Texas, the landlord/seller must also think twice before entering into a lease-option as they could run afoul of the “executory contract” provisions of Texas Property Code, Sec. 5.061 et seq. In short, these statutes dictate specific requirements (i.e., terms, documentation, disclosures, etc.) for lease-options to be legal and enforceable, and violations of these requirements can be devastating to a landlord/seller by way of fines and personal claim liability.

Therefore, while the rent-to-own model may appear to be a two birds, one stone solution, think twice before pursuing this real estate alternative.

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